Caterpillar Machinary Sales Rise 34% Boosting Earnings Outlook


RBC note on $CAT

TARGET 170.00
Caterpillar Inc.(NYSE: CAT; 144.44)
Rating: Sector Perform
Price Target:170.00 ▼ 182.00

We are intrigued by CAT at recently reduced levels given a strong underlyingdemand environment and significant restructuring, but wary of messaging around increasing price/cost pressures for the balance of the year and view that 1Q will represent best EPS quarter of the year

• CAT -6.2% on 1Q report (S&P -1.3%) as messaging around price/cost, rest of y rmargin/EPS outlook, and capital allocation/repo strategy swamped upside 1Q/large FY18 EPS raise buoyed by strong underlying demand environment across sectors/regions and margin outperformance relative to our expectations

• Although we believe CAT’s message was perhaps misconstrued (i.e., not callingcycle/demand peak), the narrative of more challenging margin expansion from already relatively high levels is likely to weigh on sentiment and valuation

• EPS $2.82 above our $2.14/cons $2.12. Backlog $17.5b +11% q/q and +18% y/y. Rev $12.9b +31% y/y vs. our $12.2/cons12.0b; dealer M&ET inventory +$1.2bfrom +$200m prior yr. M&ET incremental 37%; manufacturing costs about flat despite rev spike as lower warranty and cost absorption offset mat/freight costs and ST incentive comp

• CAT now sees FY18 EPS $10.25-11.25 (ex. restructuring) versus prior $8.25-9.25and pre-report consensus/our $9.14/9.15

• After opening up, shares reversed on comments that 1Q EPS would be high-watermark for 2018, with rest of year consol op margin impacted by
1) neg forward price/cost (although pursuing mid-yr price increase, primarily Construction),
2)y/y cost absorption swing after CAT built inventory last yr;
3) previously disclosed growth investments, inc products/services (vs. brick/mortar capacity or large transformational) and period costs.